Back in May of 2007 I expressed incredulity over the level of M&A activity, the premia that were being paid, and the amount of debt used to finance those deals (see The Future of Corporate Performance and Dumbfounded by the Data). I predicted that many of the deals fueled by cheap, and excessive, debt (and supported by specious strategic and economic logic) would end in failure. I wrote:

It seems that hardly a day goes by that I don’t pick up a paper and see a headline about a deal (whether a private equity deal or a deal involving a [strategic] buyer) that doesn’t make me scratch my head…the sheer volume of deals and the premia that firms are paying these days are eye popping.

[W]hen (and how) will this madness end? I wouldn’t be surprised to see this episode end ugly…it’s just a matter of time before we witness an increase in distressed companies, an increase in default loans, and an increase in insolvency. At some point firms will be unable to service their monstrous debt obligations.

Although not all of these deals will end in failure, the sheer quantity (and volume) of deals makes me wonder if in a few years we’ll wonder what the heck we were thinking. My guess: YES!

I specifically mentioned Sam Zell’s April 2007 acquisition of the Tribune Company.

I’ll be interested to see how a firm like The Tribune Company, under the leadership of Sam Zell, will be able to pay off its debt – at 10.7 times earnings – in a business (newspapers) where cash flows have been steadily declining.

Well, yesterday, we got our answer. The Tribune Company won’t be paying off its debt.

As reported by Reuters (see Tribune Files for Bankruptcy):

The publisher of the Chicago Tribune and the Los Angeles Times declared bankruptcy on Monday as the U.S. newspaper industry’s unrelenting loss of readers and advertisers claimed its biggest victim yet.

Tribune Co, which owns eight major daily newspapers and several television stations, filed for Chapter 11 bankruptcy protection after collapsing under a heavy debt load just a year after real estate mogul Sam Zell took it private.

Tribune’s bankruptcy filing is the latest chapter in the unraveling of the leveraged buyout boom which saw many companies bought by private equity firms and other investors ending up with massive debt loads.

Sadly, this is not the end of this story, but only the beginning. Expect to see similarly debt-saddled companies declare bankruptcy in the months and years ahead.

This entry was posted on Tuesday, December 9th, 2008 at 5:27 pm and is filed under Bankruptcies, Corporate Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.